- - Tuesday, April 3, 2012


A few years back, a national debate broke out over whether Wal-Mart is “Good for America” - as a documentary film asked. These days, it is Apple in the spotlight.

Enthusiasts tout Apple’s game-changing innovations and its investors’ breathtaking returns. Critics decry Dickensian conditions in this cash machine’s Chinese factories, plus the unapologetically Sino-centric nature of its production during a weak U.S. economic recovery. More confusing is that all of these positions express important truths.

Even critics, however, keep missing what’s most significant about Apple - its distinction as the premier practitioner of a business model that nearly melted down the U.S. and world economies four years ago, and that increasingly threatens a rerun. The model’s foundation: prizing Americans as consumers of its devices, but studiously avoiding them as producers.

Pursued throughout the U.S. multinational corporate sector for nearly two decades, this strategy has helped generate record profits. For it permitted the supply of America’s high-price market from super-low-cost, nearly regulation-free countries such as Mexico and, especially, China. Yet such offshoring stripped the nation of too much productive and earnings capacity. The new manufacturing centers, meanwhile, remained too poor or protectionist to consume enough of America’s remaining output. When Washington decided to pre-empt the resulting threat to U.S. living standards with reckless debt creation, economic disaster became inevitable.

Apple and its peers have sold a different story - of chasing billions of potential foreign customers, not slashing the costs of supplying existing domestic customers. The electronics industry version has a special twist. As the New York Times has famously reported, the manufacturing overwhelmingly in China simply reflects economic reality: Nowhere else exists an electronics production complex big and sophisticated enough to handle the massive orders. Only the quixotic, therefore, could ever expect to see American-made iPhones and iPads.

Apple just commissioned an outside report to wrap its job-creation record in the flag. But the company’s own investor reports show just how thoroughly disconnected its customer base is from its workforce. Although an unspecified share of Apple’s components are sourced domestically, the rest come from Asia and Europe, and “single-sourced outsourcing partners in Asia perform final assembly of substantially all of the company’s hardware products.” Moreover, according to McKinsey & Co., Apple also has moved some advanced manufacturing, research and development, and product design to the PRC as well.

Meanwhile, with 39 percent of net sales, “the U.S. represents the company’s largest geographic market,” reports Apple’s latest financial statement. And despite strong recent growth, Apple’s net sales in the Asia-Pacific region outside Japan still represented less than 22 percent of the firm’s total 2011 net sales.

Just as important, the Sinification of the world’s electronics industry portrayed by Apple and so many others has been anything but a natural, inevitable development. It literally was manufactured as an export base in American corporate boardrooms.

U.S. multinationals lobbied hard and lavishly for trade agreements that guaranteed access to American consumers for their China-based production. With each legislative victory, they gave Chinese employees and partners much of their best technology. No wonder that, by 2008, China represented fully 27 percent of all global electronics production, according to a recent French study - but only 10 percent of consumption.

In fairness, Apple’s China sales have been limited by some uncharacteristic marketing missteps, as well as the embarrassing gap between the list price for, say, a single iPad 4G ($499) and a typical monthly wage for a Chinese iPad worker ($350 to $450, depending on location). So maybe the company is counting on Chinese consumers to replace American consumers someday. And maybe they will. By then, however, unless America’s trade policy blunders are reversed, an offshoring-weakened U.S. economy may leave Apple and its multinational counterparts little choice.

Alan Tonelson is a research fellow at the U.S. Business and Industry Council, a national business organization whose nearly 2,000 members are mainly small- and medium-sized domestic manufacturers. Author of “The Race to the Bottom,” Mr. Tonelson also is a contributor to the council’s website, www.AmericanEconomicAlert.org.



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